Question
Italian Pizza is a restaurant franchisor. To finance its expansion plan, the company borrowed $7 million from French Finance on Dec. 31, 2012, to be
Italian Pizza is a restaurant franchisor. To finance its expansion plan, the company borrowed $7 million from French Finance on Dec. 31, 2012, to be repaid in 10 years. Annual interest on the loan (6%) would be paid on Dec. 31 of each year. Italian Pizza experienced liquidity issues and asked French Finance to restructure the note on Dec. 31, 2017 (after interest due on that day was paid). Both Italian Pizza and French Finance follow IFRS. The prevailing interest rate was 4% on Dec. 31, 2017.
Prepare journal entries that Italian Pizza and French Finance were required to make under the following independent assumptions:
(a) French Finance agreed to accept a building from Italian Pizza to settle the loan. The building had a book value of $560,000 (original cost: $2,100,000) and a fair value of $6.02 million. French Finance had already recognized a loss on impairment ($840,000).
(b) French Finance agreed to reduce the principal to $4.9 million, and reduced interest to 5% for the following five years. French Finance had not previously recognized any loss on impairment.
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